US: Honda warns against risky loan practices

One of the top managers working for the US-based unit of Japan’s third largest automaker – Honda Motor – has issued warnings against competitors engaging in “stupid” practices to lift auto sales.

According to John Mendel, Honda’s US sales boss, these practices include seven-year-long car loans that can in the long run harm the customers – he said that increasingly offering 84-month loans means a reduced monthly payment and the impossibility of the buyer to repay it faster than the car depreciates. He referred as an example to the competition from Nissan, with the Japanese carmaker aiming to overcome Honda as America’s fifth largest automaker – saying Honda will skip such longer-term loans even if that increases pressure. In an interview taken to Mendel on the sidelines of the North American International Auto Show last week he said that “extended-term loans are “stupid not just for us, but for the industry.”

His comments actually come as one of the few signs of worry among car executives present during the media preview days of the Detroit motor show – with the officials applauding 2014 as the best year for car sales since 2006. If 2015 turns accurate on predictions that see new car deliveries further rising from 16.5 million last year to 16.7 million vehicles, it would be the auto industry’s sixth consecutive year of increases and the longest growth streak since World War II. Tom Webb, chief economist at Manheim Consulting says the Federal Reserve’s zero-interest-rate policy buoys investor prospects into entering the field of auto loans – and risks arise from stretching the loans for a longer period, especially if the buyer has blemished credit scores.